Major changes in Income Tax For FY 2017-18 & 2018-19 for SME

Pravin Saraswat,  FCA, CS, DISA

Significant Changes in Income Tax Provisions by the Finance Act, 2018 For FY 2017-18 and 2018-19 for SME Businesses

New changes in the Income Tax Law by the  Finance Act, 2018  have come into the effect  from 01/04/2018 and  a few provisions  are effective from 01/04/2017, which have been mentioned  at relevant places.

1. Tax Rates

Tax rates /cess have been  changed    for the FY  2018-19  as under:

Cess has been increased by 1%  by substituting  the “Education Cess”, and “Secondary  and Higher Education Cess”, by “Health and Education Cess on income  tax”, leviable for AY 2019-20

Cess	% on Income Tax & Surcharge
	Upto AY  2018-19	From AY 2019-20
Education	2%	–
Secondary and Higher Education	1%	–
Health and Education	–	4%

 – In the case of   small domestic companies,  the tax rates would be as under:

Assessment Year	Turnover	Tax Rates
2018-19	Upto Rs. 50 Crore  in FY 15-16	25%
2019-20	Upto Rs. 250 Crore  in FY 16-17	25%

 2. TDS Rates:

– There is no change in TDS Rates for FY 2018-19.  Consequent to change in Cess rate,   HE Cess on  TDS deductible from  Salary would stand   increased from 3% to 4%  for AY 2018-19.

– No TDS u/s 194A on Interest on `Time deposits with banks’ and `Housing Finance companies’  held by a Senior Citizen  to the extent of Rs. 50000/-, would be made.

3. Standard Deduction and Allowances for Salaried Persons:

a) Standard deduction has been restored  at Rs. 40000/-  or net salary, whichever is less.

b) Exemption of Transport Allowance,  which is exempt @ Rs. 1600/- per month and  Medical Reimbursement which is  presently exempt upto Rs. 15000/-  a year,    has been withdrawn.

Net gain for those who are in receipt of Transport / Medical would be Rs. 5800/- ( Rs. 40000 –  Rs.  34200/-) only, but introduction of Standard Deduction would be beneficial for those employees/pensioners who are not in receipt of Transport Allowance /  Medical Reimbursement.

4. Deduction u/s 80D for Mediclaim / Medical Expenditure of Senior Citizen:

a) Higher Deduction is now available for Individual /  HUF,   which is being summarized as under:

	Deduction  For Individual / Family Upto 60 Yrs	Deduction  For Individual / Family Beyond  60 Yrs	Deduction For Parents Aged Upto 60 Yrs.	Deduction For Parents Aged Beyond 60 Yrs.
i) Medi-claim  Insurance	Incurred upto Rs. 25000/-	Incurred upto Rs. 25000/-	Incurred upto Rs. 25000/-	Incurred upto Rs. 50000/-
ii) Medical Expenditure (if insurance is not taken)	NIL	Incurred upto Rs. 50000/-	NIL	Incurred upto Rs. 50000/-
Maximum Deduction Rs. 50000/-

It has to be noted that Mediclaim Insurance(except payment for `Preventive HealthCare Payments’)  / Medical Expenses (e.g. Medicines/Hospital)   have to be made in a mode other than cash.

b) Now, Mediclaim  Insurance  for more than a year can also be paid    and proportionate amount for each of the years to which amount paid  pertains,   can be claimed.

5. Deduction u/s 80DDB for Specified Diseases: 

Presently deduction of Rs. 60000/-  for Senior Citizens and Rs. 80000/- for Super Senior Citizens is available for specified diseases.  Now, with effect from 01/04/2018, the deduction upto Rs. 100000/- would be permitted for both Senior and Super Senior  Citizens.  Summarised position is as under:

Type of Assessee	Age of Assessee / HUF Member	For AY 2018-19 Rs.	From AY 2019-20 Rs.
Assessee and Dependent  or HUF Member	Upto 60 Years	40000/-	40000/-
Assessee and Dependent  or HUF Member	Above 60 Years but below 80 Years	60000/-	100000/-
Assessee and Dependent  or HUF Member	Above 80 Years	80000/-

6. Deduction u/s 80TTB for Senior Citizen: 

Presently, deduction of  interest earned on Savings Account held in a bank/post-office is allowed  upto Rs. 10000/-  u/s 80TTA.  Besides to this,   exemption of Rs. 3500/- in a single account and Rs. 7000/- in a joint account held in a Post Office Savings Account  is also available  u/s  10(15).

Now,  the deduction to senior citizen  would not be available u/s 80TTA and a new section 80TTB has  been inserted  to  grant the deduction upto Rs. 50000/-   to Senior Citizen as under:

– Interest on any deposit ( including savings or time) with Banks

– Interest on any deposit with Post Office Account

7. Dividend Distribution Tax (DDT) on Equity Oriented Mutual Fund Schemes:

Every type  of dividend is exempt in the hands of recipient by virtue of section 10(34)  except the  total dividend from domestic companies in excess of Rs. 10 Lacs in a  year.

Presently  only Debt &  Liquid Mutual Funds,  who distributed the income,  were  liable  for paying `Dividend Distribution Tax’. Now, with effect from 01/04/2018, the equity oriented funds would also be liable to pay the `Dividend Distribution Tax’  at the rate of 10% + SC + Cess  effective rate = 12.9422%.    Thus,  the return for Equity Oriented Mutual Funds  would stand reduced to this extent.   The intention behind the proposed amendment is to bring a level playing field for income distribution by equity oriented mutual fund, in view of the new capital gains scheme on equity shares.

8. Deemed Dividend u/s 2(22)(e) by Closely Held Private / Public Companies:

Such companies,  who have got accumulated reserves,  can not give any advance to the  beneficial shareholders,  holding more than 10% holding  to avoid the Deemed Dividend’ income in the hands of receiving shareholders. At the same time,  payer-company  is also liable to deduct TDS on Deemed Dividend.

Finance Act, 2018 has made fundamental change in this scheme. Companies making such advance would have to pay the `Dividend Distribution Tax’ on such advance  @ 30% + SC + Cess  effective rate = 34.944%.  The amount in the hands of recipient-shareholders  would be exempt by virtue of Section 10(34).

9. Capital Gain:

a) conversion of Stock-in-Trade into Capital Asset:

Hon’ble Supreme  held  in the case of Kikabhai Premchand v.  CIT (1953) (24 ITR 506)  that no one can earn the profit from himself, unless two parties are involved.   However, now, the Government  seeks to tax the hypothetical income earned on the conversion of Stock-in-Trade to Capital Asset  by any assessee.

Conversion of stock-in-trade to Capital Asset would be permitted subject to following conditions:

i) Fair Market Value (FMV) of the Stock on the date of conversion would be treated  as business income.   Stock, which was being valued at `Lower of Cost or Market Value’  in Trading Account, would be now revalued at FMV  and difference  between Cost and FMV  would be business income.

ii) Converted Stock would  not be included  in `Closing Stock’  of business and therefore,  the  Closing Stock would be lower to this extent.  Such withdrawals of Closing Stock may affect the GP  Rate in Trading Account, which would  be required to be explained by assessee.

iii)  Cost of converted Capital Asset  would be FMV  and the holding period of capital asset for the purpose of  `Short Tem  Capital Asset’  / `Long Term Capital Asset’  would start from the date of conversion.

b) Long Term Capital Gain on Shares @ 10% in Excess of Rs. 1 Lac

Exemption of  Long Term capital gain on  transfer of STT paid shares / Units  of equity oriented mutual fund is being withdrawn and such capital gain would be taxable  @ 10% + SC  +  4% Cess. However,   to protect the LTCG already earned upto 31/01/2018  from tax,  necessary provisions have been made in the law to substitute the `Purchase Cost’   by the   highest rate quoted  in stock exchange  for such shares on 31/01/2018.   However,  basic exemption of  Rs. 100000/-   for such `Long Term Capital Gain from Shares’ would be available to  every assessee.

STT which was levied earlier,   in lieu of  exemption on  LTCG  would also continue on sale / purchases shares thru the stock exchange.

c) Capital Asset Value in case of Immovable Proeperty:

In case,  actual consideration paid ( purchase)  or received ( sale)  is lower  than  Stamp  Value, then the difference between two values  is liable for tax  as `Capital gain’, Business Income or other income.

Now,   if the difference between two  values is  5% or lower,  then such difference would be ignored.  For example:

Case	Actual Consideration	105% of Actual Consideration	Stamp  Value consideration	Consideration to be  taken for Tax Computation
1	10,00,000/-	10,50,000/-	10,40,000/-	10,00,000/-
2	10,00,000/-	10,50,000/-	10,75,000/-	10,75,000/-
3	10,00,000/-	10,50,000/-	9,75,000/-	9,75,000/-

d) Capital Gain Bonds U/S 54ec:

Presently the capital gain bonds(NHAI/REC) can be purchased  upto Rs. 50 Lacs per year  with lock-in-period of 3 years for capital gains arising from any capital asset,  within 6 months of sale of capital asset.  Following changes have been made in this law effective  from 01/04/2018:

i) Lock-in-period is being increased to 5 years on the bonds purchased after 31/03/2018

ii) Exemption would be available on Land or Building only and not on other capital asset

10. Service Of Income Tax Notice/Order/Summon/Other Communication

a) Service on the assessee:

– Physical Services may be made on the assessee thru post/courier or in the manner provided  in the Code of Civil Procedure, 1908 at the address given in PAN, ITR filed  or any other address furnished by assessee. If the service can not be made at these addresses, then Income Tax may use   Address as per form 61 / 61A,  Bank/insurance/local authority/Government records  for service.

– E-mail Address Delivery: At e-mail address in the last ITR filed or  e-mail address in the return to which such communication relates or any other e-mail address made available by assessee.

Therefore, every assessee should use correct e-mail ID in Income Tax Returns/PAN/ Income Tax Site,  on which he can receive such notices/communication from department and  he should also regularly check his  e-mail box.

b) Now all assessment proceedings u/s 143(2) , barring search cases, are to be made thru `E-proceedings Mode’. All notices/summons/orders  are to be digitally signed by the issuing officer. Assessee would also submit the replies and documents thru electronic mode under his/her digital signature.  In case assessee feels the need of explaining any matter, then he may request for personal hearing.

11. Charitable Trusts And Educational Institutions:

Trusts/education institutions  are covered by the   Trust Provisions (Section 10 to 13)  and Provisions of Business Income (Section 28 to 44)  are not applicable  to them.  However, some of the provisions now would be applicable on such trusts / educational institutions.

a) Provisions of Section 40A(3) and 40A(3A) provides for disallowance of  payments made in cash or  bearer / non-account payee cheques  in excess of Rs. 10000/-   per day.   Therefore,  such  payments would not be treated as `Application of Income’  of trust.

b) Provisions of Section 40A(ia) provide for disallowance of  domestic payments   if  assessee fails to  deduct the applicable  Payments made without TDS by Charitable /Educational Institutions would not be treated as `Application of Income’

Further,  such disallowances (at a) and b) above would attract the tax at Maximum Marginal Rate i.e. 30% plus SC plus Cess  by virtue of Section 164(2).

12. Compensation For Modification/ Termination Of Business / Employment Contract:

Any type of compensation received  on modification/termination of present or future business contract would now be  treated as business income. Any type of compensation received on modification/termination of present or future employment contract would now be  treated as `Income from other Sources’.

Though, the provision already exists u/s  17(3)(i),  however, it did not include a case,  where  there was no employment but only a proposal of employment.   New amendment seeks to  tax any compensation received or receivable in  connection with termination or modification of the terms and conditions of any contract  relating to employment

13. Filing of ITR Within Due Date:

a) Income Based Deductions to be Denied if the ITR is Not Filed Within Due Date         :

Benefits of income based deduction contained u/s 80IA  to 80RRB would not be available if the ITR is not filed within due dates.  This provision is effective from Financial Year 2017-18 and therefore the ITRs  for this year should be filed in time.

b) Late Fees For Delayed Filing of ITRs:

Section 234F now lays down for  late fees if the ITR is not filed in time from FY 2017-18 onwards. Late fees provisions are as under:

Total Income	If Return Is Filed Upto 31st December	If Return is Filed Between 01st January to 31st March
Uto Rs. 5 Lacs	Rs. 1000/-	Rs. 1000/-
Above Rs. 5 Lacs	Rs. 5000/-	Rs. 10000/-

14. Deemed Business Income of Truck Owners:

Presently, the truck owners having upto 10 Nos. of goods carriages are covered by section 44AE  wherein, their income is deemed to be Rs. 7500/- per month per truck or actual income, whichever  is higher.  This rate of Rs. 7500/-  does not differentiate between light or heavy trucks.

Now the provisions are being amended to prescribe the following level of deemed income:

Capacity of Truck	Deemed Income Per Month or Part of Month
Upto  12000 Kgs.  Of Gross Vehicle Weight	Rs. 7500/-  per month per truck
Exceeding 12000 Kgs.	Rs 1000/- per month per ton of each truck

15. Relaxation of Condition For Deduction For Employment of New Employees:

Section  80JJAA relating to deduction in respect of employment of new employees provides for a deduction of thirty per cent of emoluments paid to a new employee for three years. In order to claim the deduction, the new employee must be employed for more than two hundred and forty days in the year of employment or one hundred and fifty days in case of business of manufacturing of apparel, subject to certain conditions.

a) It is now provided to extend the reduced minimum period of employment of 150 days as applicable in the case of apparel industry to footwear and leather industry.

b) It is further provided that where a new employee is employed during the previous year for less than the specified period but is employed for said period in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly.

16. Special Tax Rate on Unexplained Credits, Investments / Expenditure, Money, Hundi  Etc.

The section applies to all assessees – irrespective of the legal status i.e. it applies to individuals, HUFs, firms, LLP, companies,  irrespective of their residential status i.e. it applies to residents as well as non-residents, including those covered by COFEPOSA, IPC, PMLA, etc. including those covered by presumptive taxation under sections 44AD / 44ADA / 44AE.  The section applies irrespective of the minimum threshold i.e. the section applies to even   Rs. 5000/-

Section 115BBE is operative with effect from FY 2016-17 (AY 2017-18) which lays down that if assessee fails to explain any credits in books of account/ bank account, source of investment/expenditure, then his income is liable to be taxed at following rates  for AY 2019-20:

	Tax Rate (Including Surcharge / Cess)	Penalty	Total Tax & Penalty
If  such Income is included in the ITR by assessee	78%		78%
If  such Income is not included in the ITR by assessee and added by Assessing Officer	78%	6%	84%

(The author is a  Jaipur based  practicing Chartered Accountant and can be reached on  09829063908, indu123@hotmail.com)